1. The Core COGS Equation
Cost of Goods Sold tracks the direct costs tied to the inventory actually sold during the period. It connects purchases directly to the matching sales revenue. The standard equation is:
COGS = Opening Inventory + Net Purchases + Direct Expenses − Closing Inventory
 
2. Handling Transport Costs
  • Carriage Inwards (Freight-In): The transport cost paid to bring inventory into the business warehouse. This is a direct purchasing cost and is added to the Cost of Goods Sold section.
  • Carriage Outwards (Freight-Out): The shipping cost paid to deliver products to customers. This is an operating distribution expense and is placed under Overheads, never in COGS.

3. The Impact of Inventory Valuation Mistakes
Because closing inventory is subtracted to calculate COGS, mistakes in counting inventory affect your reported profits:
  • Overstating Closing Inventory: Understates COGS, which artificially overstates Gross Profit.
  • Understating Closing Inventory: Overstates COGS, which understates Gross Profit.

 
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